In recent times mergers and acquisitions (M&A) have been a favorable way for companies that seek expansion but do not have enough internal resources to ensure successful expansion. The essence behind mergers and acquisitions is to ensure that the resulting shareholder value is over and above the one of the two companies before the merger. The reasoning is that when two related companies come together they can be able to enjoy such aspects as economies of scale and cushion each other during financial hard times. Such considerations are particularly important for companies when financial times are tough. M&A also help already established companies to create a more efficient and cost effective empire. Companies come together with the aim of colonizing a greater market and to attain a greater degree of efficiency. Realization of the benefits of M&A as led companies that are on the verge of collapse to give larger and established companies to take over if only to ensure their survival. However it is also important to point out that mergers and acquisitions imply very distinct ventures and should not be confused with each other. Acquisition occurs in a situation when one company in most instances the larger company takes over the smaller company completely assuming full ownership. The smaller company therefore ceases to exist legally. On the other hand mergers mostly involve two companies that are roughly of the same size that agree to form a single company. Therefore instead of the merging companies existing as two different entities they exist as a single unit under a single ownership and operating name. The stocks of the both companies are foregone and new stocks are traded under the new company. In most instances acquisitions are frowned upon not only by the staff but also the shareholders of the target company, therefore it is a common business practice that even in the instance where one company acquires another they agree to make it look like a merger to avoid agitations from the shareholders and staff. As a matter of fact most mergers are in actual sense acquisitions. Therefore acquisitions which refer to the complete takeover of a company by another should be carried out in a prudent manner because there are some subtle aspects involved that may affect the business ventures of the resulting company.
Background of the Acquisition
During the 1970s McDonnell Douglas Corporation (MDC) was like a household name in the aircraft and aerospace industry. The company began operations in 1967 after the McDonnell Company merged with the Douglas Aircraft Company. Although termed as a merger it was actually an acquisition by the McDonnell Company of financially unstable MDC. The two companies after the merger produced both military and commercial aircrafts and furthermore produced spacecrafts, missiles and data processing equipments not forgetting electronic products. The resulting company existed until in 1996 when it was subsequently acquired by the Boeing Company. MDC Company had managed to establish itself as the fourth major manufacturer of planes in North American after Boeing. MDC was involved in the manufacturer of missiles and space equipments. After the merger MDC managed to secure various contracts which involved the manufacture of DC-10 body airliner for the American United Airlines. However the company was not able to enjoy the complete benefits of this contract because it had to split the market with Lockheed another major airline producer in North America. Another major production of MDC was the DC-9 airliners that started during the 1960s and saw the company make more than 300 units of the airliners. The productions included military aircrafts which were sold to countries such as Canada and Italy. After the merger the MDC was able to make substantial improvements in terms of market scope, customer base and production capacity. These are some of the driving forces that push companies to form mergers or acquisitions and MDC took full advantage of the fact. After the successful merger MDC took wider strides because in 1984 the company had become established enough that it was able to acquire the Hughes Helicopters at a cost of $480 million whose production of the Apache helicopter had reached a production of a total of 6,000 helicopters by 1981. However MDC was not able to take full advantage of the merger because by 1989 the company had lost close to $108 million due to cost overruns.
As a common occurrence with mergers mostly when they do not succeed the company sought the services of Thomas Gunn who became the President of the helicopter production unit. The new president as expected strategically reduced the staff by a whopping 20 percent and established a new assembling method that optimized productivity. Gunn was subsequently able to bring the company back to its track. The acquisition of Hughes also gave the company the legal right to adopt the no-tail rotor contracts from Hughes. The company continued to thrive in the business because the Hughes acquisition together with the merger had strengthened the company’s capital base and ensured that it also enjoyed a wider market. Apart from that the acquisition of Hughes brought with it major advantages to the company as it was able to produce the no-rotor tail helicopters that were subsequently approved by the government because they were less risky to the ground personnel. However come 1991 MDC had already began experiencing problems related to cash flow. There were also reductions in the number of air travel a fact that affected significantly the company leading to losses close to $10 billion in the industry. Consequently customers cancelled their order and MDC was forced to delay some deliveries all of which did not go well with most customers. Significant was the fact that MDC was forced to reduce the production of MD-11 leading to extensive layoffs. MDC’s existence has always been marred by extreme highs and lows. During the 1990s the company enjoyed the post of being the largest defense contractor. A restructuring strategy employed soon after the financial difficulties became beneficial as the company was able to rejuvenate its finances and by 1993 the revenues had revamped to $145 billion. Army squadrons began to take notice of the C-17 and periodically it seemed that they would make substantial profits for the company. The company also experienced increase demand of the Apache helicopters both locally and overseas. Soon after the United States Air force signed a contract with the company worth $ 1 billion geared towards the manufacture of Delta Rocket Launch vehicles. Furthermore research institutions also signed contracts totaling $ billion.
The company was also able to capitalize on it production by venturing in the recycling business where it was involved in used commercial planes by using them in the production of much smaller planes. So far the company seemed as if it was once again getting to its feet towards regaining of the apparently lost glory. However in 1996 as a turnaround of events the company announced that it was considering being absorbed by Boeing for a total of $13 billion in stock. Apparently MDC had been losing market to Boeing especially in Europe where Boeing had established itself as the major producer of Airbus. The executives of the company were also uncertain whether they would continue to depend on military contracts as the major source of their markets. Apparently the future seemed not promising enough pushing the company to consider acquisition by its major competitor in Europe Boeing. Subsequently after an apparent up and down experiences with some highs enabled the company to acquire other smaller companies and some lows threatening its existence MDC finally threw the towel and agreed to be absorbed by Boeing.
Currently the Boeing Company is the largest aerospace company especially after it successfully acquired MDC in 1996 and the buying of the defense space units of Rockwell International Corporation. Currently Boeing boasts of being the number one producer of both military and commercial aircrafts globally. There are around 9,000 Boeing commercial airplanes including the fleets adopted from MDC. In a military perspective the company makes a range of products including fighter jets, helicopters, missiles, and transport and attack aircraft. By 1930s the Boeing company having a humble beginning had already been incorporated into a much larger company called Boeing Aircraft and Transport Company which later grew to form the United Aircraft and Transport Company which incorporated companies such as Boeing, Sikorsky and Northrop. The company also included manufacturing companies such as Standard Steel Prop and Hamilton Aero Manufacturing Company. The original owner of Boeing Company was made the chairman of the new group and Fred Rentsheler of Pratt & Whitney made the president. The merger was successful and both Boeing and Rentschler were able to reap the benefits by exchanging stock. However a government investigation in 1934 conspiracies in the airmail business which the merger was actively involved in led to the break-up of the merger and the entire Boeing aeronautics property in the east of Mississippi became a new company altogether forming the United Aircraft which later became United Technologies under the leadership of Fred Rentschler. The breakthrough for the Boeing Company came during the wartime military programme of the United States when it was invited by the government to manufacture B-17 for the US Army.
Reasons for Acquisition
Financial information of any company is an important source of functional information not only to the company itself but also to all the other stakeholders. Financial data can always be used to develop a strategic plan for the company and appropriate allocation of resources. Financial position of a company determines the most preferable method that van be used towards growth and expansion. In analyzing the Boeing acquisition of McDonalds case there are various important aspects that come into the picture considering that it came as surprise to observers who may have predicted otherwise. The move might have seemed an extreme move to many. McDonald Douglas Company and its acquisition by Boeing provides a case study that is important both corporate wise and academically in terms of bringing out some important aspects surrounding mergers and acquisitions. The resulting Company is now one of the leading airline operators in America and world over.
Boeing has over the years established itself as a brand offering various financial facilities to help in the process of development across America. There are many occurrences in the company that have had direct impact on the success. A major occurrence is when McDonald Douglas company was compelled to source for extra equity in the tune of $300 million from shareholders and other institutional investors due to the reduction in both the net profit and the dividends which had dropped by 15% and 37% respectively. The sourcing of the extra equity was not done publicly but was sought from selected individuals, institutions and other investors who were expected to raise a total of $173. The extra equity was projected to raise the tier ratio capital by a tune of 8.63% in terms of pro former and which would lead to an overall increase of capital by about 12.11%. Although such a move is taken for the best interest of the company it depicted the company in a negative business sense.The preference for credit by the company has been favorable over the year and as a result the company saw the need to increase the number of staff. However recently it had become apparent that there is need to come up with some way to tackle the issue without causing unemployment or closure of some plants. The company decided that employees would be required to go for an unpaid leave of up to ten days. However the employees were not of the same feeling and threatened legal actions against the company if they were forced to take the leave. They advised that the unpaid leave should be purely voluntary. The company later opted for the voluntary programme in order to reduce expenditure.
After the release of the update for the financial year ended June 30, 1994 it was apparent that the company had responded in various ways as a result of the financial problems. The efforts to stay in business in the face of the financial crisis have definitely impacted negatively on the company. The company experienced a reduction in funding in terms of both retail and wholesale. The continued down ward trend of the net interest margin had been as a result of the reduction in the number and frequency of air travel. Further worsening the situation is the fact that the official cash rate is also reducing with roughly the same trend as the net interest margin. The fixed term deposits are also proceeding at a very slow rate. The overall result has been the reduction in interest rates which has tremendously reduced the equity. In normal economy situation a reduction in interest rate would lead to increase in credit demand, however due to the financial crisis the company experienced a reduction in demand of its aircrafts both commercial and military, the situation became much worse. Therefore the additional security in this case also remains low. Up to the end of March the quality of margin lending credit of most banks remained low with no allowances given on write-offs whatsoever. In terms of capital an increase of 8.12 % was recorded during the time, however the total capital was by 10.75 %. The company retaliated by issuing new ordinary shares but it only presented a slight difference in the group’s earning share performance.
The company has over the years employed a cost model that ensured higher service retail. The model has been very efficient to the company but subsequent trends indicated that if the same model was applied in the face of the current financial crisis success would not be a guarantee. Another major event is the reduction of the company’s net profit to $83.3 which has forced the company to reduce the dividends from 37 cents the previous year to 15 cents this year. The financial crisis had also compelled most banks to undertake several layoffs. However McDonalds was left with little choice because the same economic reasons that leave companies with very little choice other than to engage in mergers and acquisitions will also soon drive them to adopt information technology and automation and this may further worsen the effect of mergers and acquisitions on HRM. As the global market becomes more and more competitive it is only natural that companies will seek new ways to gain advantage over their competitors. According to Adler (1997) Mergers and acquisitions (M&A) have become the dominant mode of growth for firms seeking competitive advantage in an increasingly complex and global business economy. According to a report by International Labor Organization on the Employment Impact of Mergers on the Companying and Financial Services Sector, mergers and acquisitions have become a global occurrence and apparently there are about 4,000 deals being executed every year. It is increasingly becoming difficult for businesses and companies to face global financial challenges alone therefore they are turning to consolidation for cushioning. For instance in the United States mergers and acquisitions have led to the decline of the number of companies in the companying sector. Between 1980 and 1997 the number had decreased from 12,333 to 7,122. In Europe there have also been similar mergers.
Investments for projects that take very long time are always characterized by certain fears that may arise before completion. The fears are based on issues such as operations costs, revenues and other aspects that might affect the project in terms of economics. The uncertainties can only be anticipated with a certain degree of precision and it is therefore hard to project the actual economic evaluations. The general methods include application of economics project evaluation methods. Risk adjustment discount rate is a term popularly used in capital budgeting because it helps in the analysis of future cash flows. A correct risk adjusted discount rate is where the future cash flow is not a function of cost or revenue and therefore there is no correlation. Risk adjustment interest rate is necessary when determining the current value of a risky flow of income; in general terms it refers to the rate that is free of risk. Certainty equivalent rate on the other hand is the rate that has been guaranteed for return by an investor. It is always lower than the more risky rate of return. Both approaches are used as insurance for a risk that might occur in the future. Certainty equivalent rate is generally used to determine what return investors will need from the company. In risk adjustment discount rates is where higher discount rates are used when discounting for assets that are viewed as having higher risks. Lower discount rates are used when valuing less risky assets. These are some of the possible methodologies that McDonalds could have opted for before completely considering to be absorbed by Boeing. According to the table below the new Boeing company is still being faced by financial crisis that were faced by McDonalds and perhaps it could have survived too.
Table 1. Summary Financial Results
Third Quarter Nine Months
(Dollars in Millions, except per share data) 2009 2008 Change 2009 2008 Change
----------------- ---- ---- ---- ----
Revenues $16,688 $15,293 9% $50,344 $48,245 4%
Operations ($2,151) $1,147 NA $403 $4,193 NA
Operating Margin (12.9%) 7.5% NA 0.8% 8.7% NA
Net Income/(Loss) ($1,564) $695 NA $44 $2,758 NA
per Share ($2.23) $0.96 NA $0.06 $3.76 NA
Operating Cash Flow $1,197 ($442) NA $2,391 $1,240 93%
The essence behind mergers and acquisitions is to ensure that the resulting shareholder value is over and above the one of the two companies before the merger. The reasoning is that when two related companies come together they can be able to enjoy such aspects as economies of scale and cushion each other during financial hard times. Such considerations are particularly important for companies when financial times are tough. M&A also help already established companies to create a more efficient and cost effective empire. Companies come together with the aim of colonizing a greater market and to attain a greater degree of efficiency. Realization of the benefits of M&A as led companies that are on the verge of collapse to give larger and established companies to take over if only to ensure their survival. However it is also important to point out that mergers and acquisitions imply very distinct ventures and should not be confused with each other. Acquisition occurs in a situation when one company in most instances the larger company takes over the smaller company completely assuming full ownership. The smaller company therefore ceases to exist legally. On the other hand mergers mostly involve two companies that are roughly of the same size that agree to form a single company. Therefore instead of the merging companies existing as two different entities they exist as a single unit under a single ownership and operating name. The stocks of the both companies are foregone and new stocks are traded under the new company. In most instances acquisitions are frowned upon not only by the staff but also the shareholders of the target company, therefore it is a common business practice that even in the instance where one company acquires another they agree to make it look like a merger to avoid agitations from the shareholders and staff. As a matter of fact most mergers are in actual sense acquisitions. McDonalds could have opted for another form of financing instead of opting to be cushioned by its greatest competitor which was Boeing. The company over the years had managed to build a brand name for itself and at one time being considered the major player in the sector. Currently the acquisition has led to the establishment of the new company as the largest producer of both commercial and military airplanes having an almost monopolistic stature which is not good for the business.